What’s On Their Minds: Can a Contractual Warranty Disclaimer Bar a Tort Fraud Claim Based on the Same Facts and Damages? Navistar Inc. v. Dutchmaid Logistics Inc.

By Marianna Bettman on April 26, 2022

“What statements were made that would contradict the warranty?”

Justice Brunner, to Counsel for Navistar

“So why should the Court change the bargain that you made into something else?”

Justice DeWine, to Counsel for Dutchmaid

On April 13, 2022, the Supreme Court of Ohio heard oral argument in Navistar Inc. v. Dutchmaid Logistics, Inc., 2021-0719. At issue in this case is whether a contractual disclaimer can thwart a tort claim that is based on the same set of facts and the same amount of damages.

Case Background

Dutchmaid Logistics (“Dutchmaid”) is the owner and operator of a commercial trucking fleet in the business of hauling dry and refrigerated commodities. Navistar manufactures heavy-duty commercial trucks and diesel engines. From 2008-2009, Dutchmaid purchased nine trucks from Navistar equipped with Navistar’s MaxxForce 1 engine. After about 100,000 miles, the trucks experienced significant mechanical problems due to a failure of the Exhaust Gas Recirculation (EGR) system. An EGR cooler is the part of the EGR system that pumps engine exhaust back into the engine in order to lower emissions. All of Dutchmaid’s MaxxForce 1 trucks lost their EGR coolers.

In 2010, Dutchmaid began the process of purchasing new trucks, and met with Navistar to discuss trucks with the MaxxForce 2 engine. Dutchmaid stressed to Navistar that they would need assurances as to the quality of the trucks before agreeing to buy from them again. After visiting Navistar’s plant and receiving multiple assurances as to the reliability of the trucks, Dutchmaid purchased twenty trucks with MaxxForce 2 engines from Navistar. In the subsequent 3 years, these trucks were in the shop for repairs over 100 times. In 2015 Dutchmaid filed a lawsuit against Navistar for breach of express warranty and fraudulent nondisclosure, seeking the same damages for each claim. Dutchmaid asserted that the trucks violated disputed oral promises allegedly made by Navistar about their performance.

At trial, a Dutchmaid representative testified that he repeatedly inquired about issues with the EGR system, which remained as a major concern for Dutchmaid. Each time Navistar assured him that the MaxxForce 2 was a quality engine with an EGR system that would last the life of the engine, which was one million miles. These repeated assurances were the main factors in Dutchmaid’s decision to buy the MaxxForce 2 trucks. But these trucks were regularly down for repairs, resulting in significant lost profits for Dutchmaid

During this time, Navistar executives were aware that the MaxxForce 2 engines had issues and that they hadn’t adequately tested the truck before its launch as evidenced by internal company emails. One Navistar employee testified that when the MaxxForce 2 trucks launched, the EGR had a life of 225,000 miles, not one million miles. He further stated that this wasn’t disclosed to Dutchmaid or other customers because the engines were still meeting reliability goals and many changes and improvements were made to the system between the trucks launched in 2010 and Dutchmaid’s first order in July 2011.

After hearing all the evidence in the case, the jury found in favor of Dutchmaid on the fraudulent nondisclosure claim and in favor of Navistar on the breach of warranty claim. The jury awarded Dutchmaid compensatory damages in the amount of $75,000 for lost profits, $200,000 for diminished value, and $1,025,000 in punitive damages. The trial court journalized the jury’s verdict. Navistar appealed.

The Appeal

On appeal, in a unanimous decision, the Fifth District affirmed the trial court’s judgment.

The opinion held that the economic loss rule does not bar Dutchmaid’s fraud claim because Navistar breached duties independent of those that arose under warranty. Additionally, the parole evidence rule doesn’t prohibit evidence about Navistar’s nondisclosure because there’s a difference between agreements that vary the terms of a contract and statements that induce a party into entering into that contract. Finally, a party can’t disclaim its fraudulent concealment of material information merely by using boilerplate warranty language. The appeals court also determined that since a jury found that Navistar did not breach the warranty, the damages the jury awarded to Dutchmaid for its fraud claim were not duplicative of the damages sought for breach of warranty.

Read the oral argument preview here.

Key Statutes and Precedents

*J.A. Industries, Inc. v. All American Plastics, Inc., 133 Ohio App.3d 76 (1999) (3rd Dist.) (“noting that parole evidence rule can ‘exclude evidence of fraudulent inducement.’”)

*Paragon Networks International v. Macola, Case No. 9-99-2 (1999)(3rd Dist.) (“there is an ‘exception to the parole evidence rule’ for certain claims of ‘fraud in the execution or inducement of the agreement.’”)

*Galmish v. Cicchini, 90 Ohio St. 3d 22 (2000) (“Absent fraud, mistake or other invalidating cause, the parties’ final written integration of their agreement may not be varied, contradicted or supplemented by evidence of prior or contemporaneous oral agreements, or prior written agreements.”)

Regal Cinemas, Inc. v. W&M Properties, 90 Fed. App’x 824 (6^th Cir. 2004) (Because the jury did not find a breach of contract, “there is no concern that the fraud damages duplicate the damages resulting from the breach.”)

Burns v. Prudential Securities, Inc., 2006-Ohio-3550 (3rd Dist.) (“A tort claim can proceed where ‘the facts of the case show an intentional tort committed independently but in connection with a breach of contract.’”)

Northpoint Properties v. Charter One Bank, 2011-Ohio-2512 (8^th Dist.) (the presence of a disclaimer doesn’t necessarily shield a defendant from liability and doesn’t preclude a plaintiff from showing justifiable reliance.)

Lucarrell v. Nationwide Mutual Insurance Co., 2018-Ohio-15 (punitive damages available for fraud but not breach of contract.)

*cited by counsel at argument

Navistar’s Propositions of Law Accepted for Review

Proposition of Law 1

A fraudulent nondisclosure claim is barred as a matter of law when it contradicts an express disclaimer in the parties’ agreement.

Proposition of Law 2

A fraud claim is barred as a matter of law when it doesn’t seek damages in addition to those sought under a concurrently brought contract claim.

At Oral Argument

Arguing Counsel

Kevin M. Jakopchek, Latham & Watkins, LLP, Chicago, for Appellant Navistar, Inc.

Mark Kitrick, Kitrick, Lewis & Harris Co., L.P.A, Columbus, for Appellee Dutchmaid Logistics, Inc.

Navistar’s Argument

The decision below would radically alter Ohio law and undermine decades of precedent that have provided Ohio businesses with the stability and predictability that comes with their fundamental right to have the terms of their written contracts enforced. As part of their purchase of the Navistar trucks at issue in this litigation, Dutchmaid entered into written warranty agreements that outlined the obligations Navistar made and didn’t make regarding those trucks. Those agreements are exceptionally clear that Navistar made no representations or warranties, express or implied, except those in writing in the parties’ agreement.

Dutchmaid read and accepted the warranty and for years sought and received the full benefit of it. Dutchmaid’s representative admitted that its fraud claim is inconsistent with the warranty terms because the warranty terms and its disclaimer contradict Dutchmaid’s fraud claim. That claim fails as a matter of law under existing precedent. Ohio law mandates that result for good reason. When courts enforce the written terms of parties’ bargains, they force them to get on the same page about the bargained for exchange, and price their transactions accordingly. They prevent the fate of multimillion dollar commercial transactions from turning on self-interested testimony regarding shifting memories of years-old oral conversations, as it did in this case. And Dutchmaid’s fraud claim also fails because Dutchmaid failed to identify any damages attributable to the alleged fraud that were separate from and additional to the ones Dutchmaid alleged stemmed from the breach of contract.

The negotiations occurred with the dealer and with Navistar. The warranty discussions were part of those negotiations and there is no separate consideration for the limited warranty. It was part and parcel of the purchase itself. And Dutchmaid alleged in its own complaint that it relied on the warranty when making its purchase.

The rule in Galmish that fraud claims are barred when they are contradicted by the terms of the parties’ agreements is very easy to apply here. It’s clear that was the only warranty given by Navistar, that it was given in lieu of all other warranties express or implied.

The only basis to impose a duty to disclose and the only basis that was alleged and tried by Dutchmaid, was that there were representations that were made that were not literally false but that created a false impression that Navistar had a duty to correct. Even though the claim is styled as nondisclosure, it is still premised and depends upon allegations of affirmative representation.

In this case, the warranty itself disclaims all representations and all other warranties express or implied. The trial record is not all that clear what Dutchmaid is alleging is the exact partial representation, but the warranty itself disclaims all other representations and all other warranties , so that’s the contradiction. And while it is true that the warranty was preprinted, Ohio law says that just because a contract is preprinted does not mean it is not enforceable if the other party can read and understand it. Dutchmaid understood the warranty. Dutchmaid’s own representative testified that it was clear that it meant that Navistar was making no other promises other than what was in writing. Dutchmaid alleged that it relied on the warranty and alleges that it is an enforceable contract .

There’s no dispute that Dutchmaid understood and agreed to the warranty. There are two very important policy points about why this rule makes sense. The first is related to the integrity of contracts. When manufacturers or sellers disclaim warranties or promises, the price of the transaction goes down. Conversely when they make additional promises, the price goes up. Transactions are based on all the terms in the agreement. When a plaintiff tries to circumvent the terms by claiming reliance on a promise or warranty that was not made, then it is trying to get a benefit that it did not bargain for.

The key here is that Dutchmaid agreed and for years reaped the benefits of its agreement that there were no other representations and warranties consistently getting repairs that Navistar paid for. The warranty agreement is clear that the only agreement that was made was to provide repairs when they were necessary.

Dutchmaid could have asked for a warranty that there would be no EGR cooler repairs. It did not do that. Instead, it agreed to a transaction in which it disclaimed all other representations and warranties. This wasn’t a transaction where they purchased testing services. They were purchasing a vehicle. Any representation or issue related to the testing is still attempting to enforce these expectations regarding quality which were specifically disclaimed in the agreement.

There’s no question there was an agreement in this case between the parties. There’s no question about what the terms were. There’s no question that Navistar honored every word that was written down in the agreement. The question here is whether Dutchmaid must do the same and honor its commitment that there were no other representations or warranties. Ohio law says that they do.

Dutchmaid’s Argument

This whole case stems on fraud by nondisclosure, as found by the jury. The jury rejected misrepresentation. They rejected breach of contract. Navistar never would have bought these trucks if they had been told the truth. This wasn’t misrepresentation. This is different because this is fraud by not telling, by lying, by covering up. That’s what this jury found after listening to the evidence, listening to the experts, listening to the representatives of each company. They purposely withheld information on the valve having numerous problems and they didn’t have the test time on the road. Trucks are supposed to run about a million miles. They were having problems after about 100,000 miles. They were losing value. There’s not one single reference in this warranty for nondisclosures, or reliance. Material points were purposefully withheld here.

The fraud was the lack of the statements, and that is the key. The jury rejected misrepresentation. They found fraud by nondisclosure. That’s a critical distinction. Misrepresentations and nondisclosures should not be lumped together. They are different claims. One’s a tort. One could be a potential contract breach.

Because Navistar had problems with the Maxx1 trucks, they pushed their new Maxx2 trucks. Navistar specifically did not disclose the problems they were having. The jury found there weren’t misrepresentation but there were nondisclosures. There is separate law for nondisclosure and fraud, –this is fraud by the inducement. That is separate from misrepresentations. This contract was born out of the fraud in the inducement to begin with.

Navistar made the warranty here. There’s no discussion in that warranty saying they disclaimed any and all reliances. There’s not one word of reliance in that express warranty. If Navistar had said any reliances ever made are disclaimed, that’s a different story and we probably wouldn’t be here. It’s one thing to say we’ll fix your trucks. It’s another basically to mislead by inducement and have you make the deal to begin with. If you don’t have the knowledge or are being misled by concealment, how can you really make an informed decision at that point on a material decision making situation? If you don’t tell somebody the truth and you lie about it, how can you say that’s a good, informed decision when you sign something?

The jury did not find this was a breach of a misrepresentation, a breach of warranty. The jury didn’t say that the warranty was breached. They found the whole warranty occurred because of the fraud in the inducement to begin with. The two can’t be mixed. This court has continuously upheld special separate tort actions compared to contract actions. The jury didn’t find there was a breach of contract here. Navistar did try to fix those trucks numerous times. But Dutchmaid found they were lied to not by misrepresentations, but by omissions. Fraud by nondisclosure was enough to cause Dutchmaid to buy these trucks. Had they known the truth, they wouldn’t have bought these trucks or made this deal to begin with.

This whole thing started with the fraud. That’s where this is. Navistar wants to reap the benefits of deception that led to the purchase of these trucks and pay nothing. That’s an unreasonable, unfair, unconscionable result. We want to deter fraud. We want to discourage it. We want to uphold proper contracts. This court has the power to stop such conduct. The jury’s finding should be upheld.

What Was On Their Minds

Representations and Warranties

Does it make a difference in applying Galmish, that the purchase was from a dealership and not directly from Navistar, asked Justice Brunner? What about the difference between a misrepresentation and a concealment? What statements were made that would contradict the warranty?

Wasn’t it just a general boilerplate disclaimer, asked Justice Stewart? There were no discussions or negotiations on what would be included overall, right? I don’t mean to say it has no validity, she added. But when you are talking about express warranties or representations, and you’re saying there’s a meeting of the minds where this standard form says everything means everything -are you saying that is adequate enough for alleged fraudulent misrepresentation?

The fraud was what, the statements, asked Justice DeWine? If we adopt Dutchmaid’s view, what is the point of a warranty? Aren’t what Dutchmaid is calling disclosures actually representations? Doesn’t the warranty clearly disclaim any representations? He added that when one party doesn’t tell the other party something, to him that was a representation. If someone asks you, are there any problems and you say no there’s no problems, that’s a representation, he added. Why isn’t this just a contract claim? Someone buys a truck and the truck doesn’t perform the way it is supposed to—that sounds to me like a contract, he added. Don’t we have the rule about fraud in the inducement when it’s within the scope of the written contract? When there are two sophisticated parties, since when can one say well this was boilerplate we didn’t actually read it, our attorneys said it didn’t matter? Couldn’t Dutchmaid have negotiated for whatever kind of warranty it wanted? Dutchmaid had a warranty that covered repairs and it didn’t cover time for its losses for not having the vehicles. If Dutchmaid wanted to negotiate for that, it could have negotiated for that, it would have had to pay more, I’m sure, but Dutchmaid didn’t negotiate for that. So why should the Court change the bargain that Dutchmaid made into something else?

Is the warranty irrelevant at this point, asked Chief Justice O’Connor? The way this warranty is written, is it irrelevant to the fraud that preceded the execution of the contract with this warranty in it? So, is focusing on the warranty really misfocusing?

Disclosures

What gave rise to the obligation to disclose and what was it that Navistar should have disclosed, asked Chief Justice O’Connor?

Court of Appeals Decision

Didn’t the Court of Appeals say that the language in this contract, standard agreement, can’t vitiate fraud, asked Justice Stewart? That you can’t escape liability from deliberate misrepresentations under a standard contract?

Did the court of appeals get it right that just because this was some kind of boilerplate it wasn’t important, asked Justice DeWine?

Precedent

Does the Court need to overrule Lucarell v. Nationwide to go with Navistar’sargument, asked Justice Fischer? There’s a discreet preexisting duty in tort even if there is a contract?

The Trucks

Is it accurate that there were over 100 instances of repair needs over this couple years, asked Chief Justice O’Connor? Were the majority of the repairs having to do with the EGR cooler? Was the representation by the representative that this particular problem had been fixed?

Were these new trucks, asked Justice Brunner? Was the question of adequate stress testing of the Maxx 2 trucks of significance to Dutchmaid? Would it have made a difference if they would have known that they weren’t tested to the point where they could be released?

How it Looks From the Bleachers

To Professor Emerita Bettman

The Chief and Justices Stewart and Brunner seemed to buy Dutchmaid’s argument that their claim was a tort claim for fraudulent nondisclosure, and not a breach of contract claim for misrepresentation or breach of warranty. Justice DeWine, on the other hand, seemed adamant that everything Dutchmaid was claiming as fraud were representations disclaimed by the warranty in the contract, and which the jury found in Navistar’s favor.

To Student Contributor James Gravely

Navistar’s counsel, Kevin Jakopchek, stuck to what I believed to be his most compelling argument: the written warranty itself disclaims all other warranties, express or implied. Jakopchek went on to say that while the trial record isn’t clear as to what Dutchmaid is alleging is the partial representation, whatever it may be, the warranty certainly disclaims it.

Jakopchek makes a policy argument that when manufacturers disclaim warranties the price of the transaction goes down, but when they make additional promises the price of the transaction increases. So, when a plaintiff tries to circumvent the terms of a contract by claiming reliance on a promise that was made, they’re trying to get a benefit that they didn’t bargain for. Importantly, Justice Stewart appears to disagree with this notion, especially when faced with a fraud claim. Navistar responds that this is inconsistent with Ohio law, as there are cases where disclaimers are applied to certain fraud claims such as those that would contradict the unambiguous terms of an agreement.

Justice Brunner had many questions for Jakopchek but did not seem completely convinced by his argument. She focused on the representation made by Navistar’s employees and the number and type of repairs made to the trucks. She seemed at least amenable to Dutchmaid’s argument by inquiring into what Dutchmaid would’ve done if they had been given all the information- a question easily answered by Dutchmaid’s counsel, Mark Kitrick.

Chief Justice O’Connor summarized Kitrick’s argument succinctly by questioning the relevance of the warranty at all, especially considering the fraud that preceded it’s execution. Kitrick agrees that focusing on the warranty results in a misfocusing on the case as a whole. She also seemed less than convinced by Jakopchek’s argument as she focused on the failure of the EGR system as well as on the representations made by the Navistar sales representative.

Justice DeWine appears to be more unreceptiveto Dutchmaid’s argument about the subject of the case being a fraudulent nondisclosure, not a misrepresentation. He pressed Kitrick by arguing that his examples of nondisclosure’s were actually just misrepresentations by saying, “you’re trying to slice a pretty thin apple here.” Kitrick admitted that the distinction was thin but disagreed with Justice DeWine’s definition of a misrepresentation. This is likely the biggest flaw in Dutchmaid’s argument.